A Washington Liquidity Infusion The Senate virus bill may help the economy stave off a depression.
https://www.wsj.com/articles/a-washington-liquidity-infusion-11584919023?mod=opinion_lead_pos1
Federal and state governments have shut down much of the American economy, and now Washington is moving to lend its balance sheet to compensate for some of the losses it is causing. The foremost goal should be to provide liquidity to prevent defaults and business failures that will cascade into mass layoffs and another depression.
By our deadline, the Senate had not reached a final deal. But the bipartisan draft bill and summaries we’d seen on Sunday afternoon were a major improvement on the state of play on Friday. The overall cost is murky, though it will be in the multi-trillions of dollars, and that includes hundreds of billions in subsidy payments to individuals to buy broad political support.
The version we examined is nonetheless worthy of Senate passage—not least to avoid House Speaker Nancy Pelosi making it worse. She and Senate Minority Leader Chuck Schumer were blocking a deal late Sunday with more demands from their non-virus-related policy wish list.
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The window for providing liquidity to stressed businesses is closing faster than many realize. Markets face another tumultuous week, with many industries hard-pressed to find financing. Real-estate investment trusts, with investments in shopping malls that have few customers as people stay home, are one problem to watch. Non-bank financial institutions are another.
The most urgent need is for the Treasury to have more money to backstop the Federal Reserve as it stands up one or more facilities to provide liquidity. The Senate bill evolved for the better on this point over the weekend. The bill appropriates up to $425 billion for the Treasury’s Exchange Stabilization Fund that backs Fed facilities under Section 13(3) like the one launched last week for money-market funds. (There’s another $75 billion for airlines and firms deemed crucial to national security.) This can be leveraged up to well over $1 trillion in lending power to calm markets.
As important, the Senate language shows the Treasury and Fed will be able to provide this money to all comers who don’t qualify for the bill’s small-business lending provision. One holdup is Democratic demands to attach more burdens on businesses that borrow from the Fed, such as dictating union board members or limiting executive pay.
There should be as few strings as possible because the point is to coax distressed companies to use the facility before they are on the verge of failure. The point is to prevent bankruptcy or default, not hope to salvage companies when they’re about to fail. Strings-free loans will encourage still-healthy firms to participate and prevent further economic harm.
The bill does block companies that take direct loans from buying back stock for the duration of the loan. This is fair since if you need taxpayer cash to operate you shouldn’t be weakening your capital structure. Democrats want the buyback limits to continue forever, which is purely punitive. The bill also allows the Treasury Secretary, at his discretion, to seek warrants, preferred shares or other equity from borrowers. We trust Secretary Steve Mnuchin will use this only in the most extreme circumstances, and he would not be able to exercise voting rights on common shares in the language we saw.
Senator Elizabeth Warren and other progressive Democrats are calling these loans a “slush fund” and “bailout” (see nearby), as if these companies created the coronavirus. The government shouldn’t be able to deny companies their customers and revenue—no matter how vital the public-health cause—and then demagogue and demand that government have a major say in running the companies. That’s a ruin-and-rob strategy that President Trump and the GOP should not accept.
A second liquidity provision provides about $350 billion for small businesses of fewer than 500 employees, and that too evolved for the better. Businesses will have access to loans of up to $10 million for working capital like paying employees and keeping the lights on. The portion of the loan that finances employees will be forgiven if workers aren’t laid off and don’t see a major reduction in pay. This prevents businesses that operate on a narrow cash margin—which is most small businesses—from taking on debt that will swamp them once the virus crisis is past.
The main rub here will be bureaucratic, since the loans will be administered through the Small Business Administration’s 7(a) program. The SBA has neither the systems nor the employees to do this quickly or efficiently. With that in mind, the bill attempts to streamline the bureaucratic traps so some 800 or so SBA-approved banks and other lenders can move the money fast.
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The political price for getting this relief to private business is a huge expansion in welfare programs and jobless insurance for the states. We hope these payments won’t induce too many essential workers to stay home during the crisis and beyond. We don’t mean the front-line public-health workers who will continue to do heroic work despite the risks. The country also needs pharmacies, grocery stores, delivery companies and vital manufacturers to operate during the virus shutdown.
None of this government intervention is easy for a free-marketeer to swallow, and this bill is so large and complex that we will be discovering more about its details for weeks. The good news is that most of its provisions, including its business lending clauses, expire on Dec. 31 this year when the crisis should have eased.
This liquidity panic isn’t the result of bad business decisions. It’s the result of government orders to save lives. The loans are designed to keep employers alive during this forced shutdown so employees will still have jobs when it’s over. The Trump Administration still needs a Phase Two strategy soon to move past the shutdown, and Democrats need to end their partisan obstruction lest they send the economy into a far deeper recession.
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